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2020 (10) TMI 424 - HC - Income TaxDepreciation on intangibles - trademarks owned wholly or partly by the assessee - assessee succeeded to the business of the partnership firm, which had trademarks registered in its name - whether absence of any tangible material but merely on the basis of additions made in subsequent assessment year 2007- 08? - eligibility to claim depreciation only with reference to the written down value of transferred assets in the hands of predecessor firm and not with reference to actual cost incurred by it - HELD THAT:- Intangible asset of the assessee has a real money value. The aforesaid trademark viz., the intangible assets were transferred to the assessee for a valuable consideration. Section 32(1) provides for depreciation in respect of trademarks owned wholly or partly by the assessee. In the instant case, the assessee succeeded to the business of the partnership firm, which had trademarks registered in its name - assessee u/s 32(1) was entitled for depreciation. It is also pertinent to note that under Section 47 of the Act, any transfer of capital asset or a intangible asset by a firm to a company as are result of succession of the firm by a company is a recognized mode of transfer. Admittedly, the assessee and the erstwhile partnership firm are different entities and there was transfer of intangible assets by the partnership firm to the assessee for a valuable consideration that is by way of allotment of shares. Thus, the aforesaid transaction is squarely covered under Section 47(xiii) of the Act and therefore, the assessee under Section 32(1) was entitled for depreciation with reference to actual cost incurred by it with reference to intangible assets. Accordingly, the second substantial question of law is answered in favour of the assessee and against revenue. Whether 5th proviso to Section 32(1) of the Act restricts the total depreciation which can be claimed in case of succession etc. to the depreciation which would have been allowable had there been no succession? - 5th proviso to Section 32 of the Act restricts aggregate deduction both by the predecessor and the successor and if in a particular year there is no aggregate deduction, the 5th proviso does not apply. Thus, it is axiomatic that until and unless it is the case of aggregate deduction, the proviso has no role to play. The 5th proviso in any case will apply only in the year of succession and not in subsequent years and also in respect of overall quantum of depreciation in the year of succession. Accordingly, the third substantial question of law is answered in favour of the assessee and against the revenue. Invoking Explanation 3 to Section 43(1) - It has to be established that apart from claiming additional depreciation on enhanced cost there is no other main purpose for acquiring the asset in question and the AO has to obtain the previous approval of the joint commissioner to disregard the enhanced price. AO in the instant case, in the order of assessment has neither complied with the aforesaid conditions nor has recorded any finding in this regard. CIT (Appeals) however, failed to appreciate the aforesaid aspect. Therefore, the Tribunal committed an error of law in upholding the order of Commissioner of Income Tax (Appeals) in invoking Explanation 3 to Section 43(1) - Decided in favour of the assessee.
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